When a Schedule C (Sole Proprietorship) Actually Saves You Money

Under the Trump Tax Plan, effective 1/1/2018, there are a lot of changes to tax strategies. You may find the things you’ve been doing are the exact opposite of what you should be doing to save on taxes now.

An example of that is the Sole Proprietorship or Schedule C. For years, I’ve recommended that you not have a Sole Prop simply because you’ll pay more tax. That’s because of the self-employment tax.

The Trump Tax Plan didn’t change self-employment tax, but it did offer a new reward, the 20% income deduction.

In this example from the “Advanced Section 199A Strategies for Businesses Home Study Course”, the Sole Prop and S Corp are contrasted in a set of different circumstances.

“Let’s start off assuming your taxable income is below the income threshold. You’re married and your Schedule C business makes $100,000 per year in net income.

You also contribute $5,000 for self-employed health insurance and are able to take a deduction for $7,065 (half of the self-employment taxes). Those are adjustments to income and don’t impact your deduction.

You have a possible reduction of $20,000 under the 20% income reduction.

If you formed an S Corp and paid yourself a partial salary, your possible deduction would be reduced by 20% of the amount of your salary. So, let’s say a reasonable salary would be $40,000 per year. There would be payroll taxes that would be paid by the company. The company’s portion would be $3,024. Since it reduces the corporate income, that would mean you have to subtract that from the amount that receives the 20% income deduction.

Here is the math: Total income ($100,000) – payroll tax ($3,024) – salary paid ($40,000) That gives us $56,976. The 20% income deduction would be $11,395.

So, let’s compare those two:

Schedule C: Income deduction $20,000 S Corp: Income deduction $11,395 Remember that the bigger the deduction, the less the tax.

Maybe we need to take another look at Sole Proprietorships.”

Does this work in every case? No. And you still have asset protection and credit building considerations. The point is that the old strategies don’t always work anymore. You need to look at all of your tax strategies with fresh eyes.

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